The streaming media transformation of the global entertainment giant Disney is in trouble. The number of Disney+ subscribers has lost 11.7 million in the past three months. In the third fiscal quarter of 2023, Disney also experienced a rare quarterly net loss, and many performance indicators fell short of market expectations. At the same time, the stock price of Disney’s rival Netflix has risen by more than 40% this year, while Disney’s stock price has fallen all the way after peaking in 2021.
FY3Q report mixed, valuations underperform but risks remain
On August 9 local time, Disney announced its 2023 third-quarter results. In the quarter ended July 1, Disney achieved operating income of approximately US$22.33 billion, a year-on-year increase of 3.84%, while Wall Street had previously expected revenue of US$22.5 billion.
During the reporting period, Disney’s net loss attributable to its parent was approximately US$460 million, compared with a net profit of approximately US$1.409 billion in the same period last year, and its net profit attributable to its parent fell by 132.65% year-on-year. The loss was largely due to Disney recording a $2.65 billion one-time charge and impairment in the fiscal third quarter of 2023, with most of the loss coming from what Disney calls “content damages” involving the removal of content from its streaming platform and the termination of third-party programs. Tripartite License Agreement.
Although indicators such as revenue and net profit fell short of expectations, earnings per share during the reporting period were still slightly higher than market expectations. Diluted earnings per share came in at $1.03, down from $1.09 in the previous quarter and slightly above the $0.99 consensus estimate, according to Refinitiv data.
As the world’s most successful IP content company, Disney has consistently outperformed the broader market. From 2010 to 2021, Disney’s stock price has increased by 414.9%, far exceeding the S&P 500’s 101.5%. However, since the stock price reached a peak of US$189 per share in 2021, Disney has started a downward trend, and it has fallen to US$91.76 per share so far, and its market value has also fallen by US$200 billion.
Since the beginning of this year, while AI has driven the strength of US technology stocks, Disney’s stock price has only risen by 2.79%, while Disney’s competitors Netflix and Warner Bros. have both achieved returns of over 40% since the beginning of the year.
Atlantic Equities analyst Hamilton Faber said: “The stock is cheap, trading at 10-year lows at just 17 times forward earnings per share, compared to 22 times forward earnings for the S&P 500. But cheap, for sure. There’s a reason.” He recently cut his price target to $76 a share from $113.
Seeking Alpha analyst Vladimir Dimitrov believes that Disney’s biggest risk factor is the uncertainty of operating profit margins. Before 2019, Disney’s net profit margin was more than 15%, but today this figure is only about 5%.
The performance that did not meet expectations and the stock price under constant pressure all point to the potential risks faced by this entertainment giant. Disney CEO Bob Iger said on the company’s earnings conference call: “Looking forward, I think there are three businesses that will drive the greatest growth and value creation over the next five years, and they are movie production, theme park business and streaming media business, all of these businesses Both are inseparable from our brand and IP.”
Loss of streaming media users, Disney turns to price increase strategy
The reason for Disney’s declining profitability may be found in its streaming transition.
In the past few years, when traditional Hollywood studios vigorously embraced streaming media, Disney relied on its rich IP resources to “transfuse” its streaming media platform Disney+. “Mulan”, “Black Widow” and a large number of Pixar animations were directly launched on Disney+. Let Disney+ gain the first-mover advantage and quickly pass the start-up period. Since its launch in 2019, the growth of Disney+ subscribers has surpassed Netflix for several consecutive quarters, but starting from the first fiscal quarter of fiscal year 2023, the number of Disney+ users has begun to lose.
Financial report data show that in the past three months, the number of subscribers to Disney+ has dropped from 11.7 million to 146.1 million, a decrease of 7.4% from the previous quarter and lower than market expectations of 154.8 million. Disney’s streaming media platforms Disney+, ESPN, and Hulu have a total of 219.6 million subscribers, while rival Netflix will increase its subscriptions by a net 5.89 million to 238.4 million in the second quarter of 2023.
Specifically, the user loss of Disney’s streaming media business mainly comes from Disney+Hotstar. After losing the rights to broadcast the Indian Premier League, the number of subscriptions on the platform fell by 24%. At the same time, during the reporting period, Disney+’s content reserve itself was relatively average, and users in the local market were also losing a small amount, which resulted in a net loss of 11.7 million Disney+ subscribers from the previous month.
After Bob Iger returned to Disney, he focused on the streaming media business. Therefore, both Disney itself and the market are more concerned about the changes in the number of streaming media subscribers. Disney management has stated that it plans to increase the number of Disney+ global subscribers to 230 million to 260 million by the end of 2024. However, the total number of Disney+ subscribers has declined for two consecutive quarters.
In addition to the “user target”, the high cost of streaming media investment has also affected the profitability of Disney’s streaming media business. Since 2023, the cumulative operating loss of Disney’s streaming media business has reached 2.224 billion US dollars, and the high input costs have dragged down Disney’s profitability.
In early July, Bob Iger mentioned two directions to increase the company’s profitability: one is to dispose of declining businesses as soon as possible, such as cable TV. Bob Iger has expressed his consideration of selling this part of the business. In his view, traditional TV is not Disney’s core asset, because cable TV will inevitably be close to “extinction.”
The other direction is to accelerate the transition to streaming media, acquire the remaining Hulu equity, and completely convert ESPN+ to streaming media. Looking back at the performance of Disney’s streaming media in the past two years, its revenue share is indeed growing. Financial report data show that in the third fiscal quarter, Disney’s direct-to-consumer business achieved revenue of US$5.525 billion, a year-on-year increase of 9%; operating losses narrowed from a loss of US$1.061 billion in the same period last year to a loss of US$512 million, a year-on-year increase of 52%.
At the same time, Disney changed its low-price strategy and began to imitate Netflix to increase the price of streaming media services, while curbing the sharing of account passwords. At this earnings conference, Disney announced that starting in October, the monthly fee for the ad-free version of the Disney+ service will rise from $10.99 to $13.99, and the monthly fee for the ad-supported version will remain unchanged. So far, the market has reacted positively, with Disney shares up 4% in after-hours trading on Aug. 10 following the announcement.
Content influence is the “life” direct-to-consumer business is expected to be profitable in fiscal year 2024
The user stickiness of streaming media often comes from the reserves and updates of platform dramas, but Disney’s circle of competence is more inclined to movies. At the beginning of Disney+’s launch, Disney attracted traffic by transferring classic old dramas and movies to the platform, but after the start-up period, this model is difficult to sustain.
Disney has invested heavily in content investment in the past year, but in the last two quarters, under the pressure of profitability, it is gradually reducing its budget. At the same time, the wave of strikes in Hollywood has also stagnated the progress of Disney’s self-made content, and it can only supplement content in the short term by purchasing external copyrights. In contrast, its rival Netflix entered a new content investment cycle in the most recent quarter.
Content can be said to be Disney’s “life”. However, from a revenue perspective, Disney’s content influence also seems to be on the decline. In the third fiscal quarter, Disney’s content sales achieved revenue of US$2.08 billion, a year-on-year decrease of 1.4%.
In recent months, Disney has struggled to stand out at the global box office. Only “Avatar 2” and “Guardians of the Galaxy 3” have generated more than $3 billion in box office worldwide, and the performance of other films has not been satisfactory. Pixar’s Elements, for example, cost about $200 million to make but grossed $423 million worldwide; Raiders of the Lost Ark: Disk of Fate cost about $300 million to make and grossed just $369 million worldwide.
Among this year’s summer movies, Universal Pictures’ “Super Mario Bros.” was adapted from a Nintendo game. The world went to the big screen, setting off a “pink storm” all over the world.
In contrast, Disney has focused on live-action film remakes of classic IPs in the past two years, from “Mulan” to “The Little Mermaid” and “The Lion King” to “Snow White” and “Enchanted” in preparation. The remake of a live-action movie can maximize the value of the original IP, but the box office performance of some movies also shows that the plot is magically changed and the casting does not conform to the original work, which will cause dissatisfaction among the audience.
Bob Iger admitted on the conference call: “The performance of our last few movies has been really disappointing, and we will not take it lightly.” He said that Disney will focus on improving the quality of upcoming movies and reducing the number of releases. Lower cost per movie.
Vladimir Dimitrov analyzed that Disney management is currently working hard to control soaring production costs and promises to reduce the number of new content. Fees also appear to be maxed out. That’s good news for long-term shareholders, but in the short term, higher-than-expected restructuring charges could easily lead to more downside risk.
”However, this downside risk is largely limited as Disney’s stock is currently in a better position compared to 2021. The current price yields a P/B that is in line with the company’s current adjusted return on equity .This is in stark contrast to 2021, when the share price was trading at a level well above the level corresponding to the company’s ROE. On the face of it, the direct-to-consumer segment appears to be on track to be profitable in FY 2024,” he added .